Alexandria Ocasio-Cortez and the Revenge of the Millennials

(Bloomberg Opinion) -- Almost every major new economic initiative proposed by Democrats — the Green New Deal, Medicare for all, debt-free college — has a common feature: Unlike most current social programs, it would benefit younger Americans at the expense of older Americans.

Since the New Deal, America’s social insurance programs have primarily transferred resources from the relatively young to the old. Social Security was designed as a program to support the aged and those unable to work, and over time its spending has come to be dominated by payments to retirees. Medicaid was intended for the poor, but now mostly pays for medical care for lower-income older Americans. Medicare has always been focused on serving senior citizens.

True, health-care spending tends to go toward older Americans anyway. But these programs are prone to letting younger Americans fall through the cracks. In 2018, the uninsured rate for Americans overall was 8.8 percent, but for Americans aged 26 to 34, it was 16.2 percent. Medicare for all would represent a much larger expansion of health insurance among young adults than among older adults — with a corresponding increase in costs. These costs would have to be made up with either higher taxes or, more likely, reductions in services for those who currently have Medicare.

Likewise, the young have the most to gain from a Green New Deal. First, and most obviously, they are likely to live long enough to reap the benefits of any impact it might have in mitigating the effects of climate change. Second, and more immediately, the Green New Deal is likely to create jobs in the development and installation of renewable energy technology. Both the technical skills and the physical labor required for this work are likely to come disproportionately from the young.

The argument that a debt-free college policy will mostly benefit the young hardly needs an explanation. Yet it is even more skewed toward them than it appears: It’s not a given that such a program would result in many more Americans going to college (if that happened, the overall benefits — from the increase in skilled workers — would be widespread). Instead, more students would leave college without owing tens or even hundreds of thousands of dollars in debt. That reduced debt burden represents a direct transfer from older Americans to younger ones.

None of this is to argue against the goals of these Democratic proposals. But they represent a radical departure from the past and current model, and it’s interesting to consider why they are all coming now. My favorite theory — and that’s all it is — is that they are payback for decades of pro-elderly monetary policy.

If you bought a house or started investing in stocks and bonds in the late 1970s or early ’80s, you probably did pretty well. At the time interest rates were high; at their peak in October 1981, the average home mortgage rate was 18.5 percent. High interest rates tend to push down the value of the underlying asset. So while interest payments on homes may have been exorbitant, the principal was relatively small.

These high interest rates were designed to reduce inflation, and they worked. As inflation fell, so did interest rates. In response, asset prices soared. That means that houses — as well as stocks, bonds and other assets that Americans of that generation bought — went up in value. And, with new lower interest rates, many homeowners could refinance and save even more.

Meanwhile, those low interest rates made student debt look less daunting, so many states allowed their university systems to raise tuition. (In many cases, the rationale was that full-paying students would subsidize aid for lower-income students.) All those paying customers radically changed incentives for universities. Instead of focusing on academics, they spent lavishly on administrative staff, campus renovations and amenities, largely in an effort to improve the student experience. Upon graduation, however, students found that their more expensive educations had not brought them more lucrative job opportunities.

Why? Well, the same monetary policy that pushed down inflation also reduced job growth, particularly for entry-level workers. College students were entering a sub-par job market with an above-par amount of debt.

Now, finally, it seems that they have had enough. They want to use fiscal policy to help repair the damage wrought by monetary policy. This isn’t necessarily the way I would address the issue; I would argue for fixing monetary policy instead of spending vast additional sums to support a new suite of government entitlements. I am certainly sympathetic, however, to those who think otherwise.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a senior fellow at the Niskanen Center and founder of the blog Modeled Behavior.

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